Market shrugs off European inaction

DESPITE the failure of European leaders to agree to a crucial Greek debt deal this week, Australia's sharemarket still recovered most of last week's losses.

It is now back above 4400 points, helped by evidence that US and Chinese growth has picked up.

Meanwhile, the dollar made headlines after the International Monetary Fund said it was thinking about giving the currency a higher profile in central banks' reserve data.

For the week, the benchmark S&P/ASX 200 Index rose 76.2 points, or 1.7 per cent, to 4413 points, while the broader All Ords gained 71.4 points, or 1.6 per cent, to 4431.5.

The IMF said the dollar might soon be listed as its own entity in central bank holdings, joining a group of reserve currencies that include the US dollar, euro, yen, pound and Swiss franc.

Reserve Bank governor Glenn Stevens said such a move would have little material effect.

But it still got people talking about the strength of the dollar, which is one of the five most traded currencies in the world.

In the past three weeks, the dollar has traded between US102.87¢ and US104.80¢, and currency strategists said its emerging status as a ''reserve currency'' could explain why it has been trading in such a tight range.

''There's a theory going around that the presence of central banks in the market basically 'top and tail' any big price movements in the Australian dollar,'' ANZ foreign exchange strategist Andrew Salter said.

''The Aussie has been an increasing part of central bank portfolios, that's one of the big stories of 2012, and when central banks add it to their portfolios they have to rebalance their portfolios on a daily or weekly basis to keep the value of their portfolios within the risk limits that are dictated by their mandate,'' he said.

That means if the dollar appreciates, its value in central bank portfolios goes up, and they have to sell Australian dollars.

''So if the Australian dollar goes up, they sell, and if the Australian dollar goes down, they buy, so it compresses the price action.''